(Bloomberg) — As sports gambling takes off in the U.S., quickly becoming a multibillion-dollar business, a troubling trend is starting to emerge: Americans appear to be pulling money out of their stock brokerage accounts to finance their bets online. .
This is the main discovery presented in a recent time working paper titled Stability of gambling: The impact of sports betting on vulnerable households. It claims to find evidence that for every dollar spent on the recreational activity – now legalized in most states as of 2018 – net investment in stocks and other financial instruments fell by just over $2.
The phenomenon is most acute among the most financially strapped households, potentially the same ones drawn to get-rich-quick schemes in financial markets such as meme stocks and speculative options.
“It's not just a harmless outgrowth of an entertainment entertainment industry, although it certainly is for certain types of families.” Jason Kotteran assistant professor of finance at Brigham Young University who co-authored the paper said in an interview. “There is a real cost particularly to limited families here that I think should concern policymakers.”
Casino advocates see it differently, saying the study, which has yet to be peer-reviewed by academics, makes false comparisons between investing and gambling, with the latter more likely to compete for entertainment dollars. Whatever the case, exciting retail pursuits—from sports betting to financial trading—are thriving in the post-pandemic era, and gamified platforms of all stripes are being accused of baiting engagement by giving Americans a dopamine high in an effort to increase online action.
Framed in this way, sports betting and equity speculation can be seen as two sides of the same coin. As such, speculative stock trading may even save a group of gambling-addicted Americans from a worse fate: Throwing their money into online sports betting — money that could instead be deposited into the accounts of their stock trading.
Regardless of your view of the interaction between gambling-like activities, it is increasingly the subject of study. Meanwhile, Robinhood Markets Inc. is taking steps to turn the retail crowd away from casino-like betting at companies like GameStop Corp. and towards sensible investments for tracking the index.
While stock trading with shaky finances often draws a parallel with gambling, whether broad stock investing can be treated as the same category is debatable. THE David Formanvice president of research at the American Gaming Association, newspaper exaggerated the effect of gambling on the financial health of households, and more importantly, its premise was flawed.
“They talk about spending on sports betting as a negative expected value investment compared to other positive expected value investments,” he said. “This is not how consumers think about spending their entertainment dollars on sports. It's not an investment, it's an entertainment option.”
But for Kotter, it makes sense to compare gambling with investing in stocks, both of which involve risk taking and financial reward. “You might expect a person's natural risk-taking tendencies to influence their decisions in both gambling and investing,” he added.
The gaming industry is well aware of the financial risk reckless gambling poses to American families. In March, seven of the largest US online gaming companies formed one alliance to encourage responsible gaming, with some firms offering products that help customers better gauge their activity and spending habits, according to Jennifer Shatleyexecutive director of the Association for Responsible Online Gaming.
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The stock market itself, especially during the lockout when many sports were canceled or restricted, has been a microcosm for speculative psychology. Retailers have flocked to options trading, now accounting for a record 18.8% of total market activity, exchange data compiled by JPMorgan Chase & Co. shows.
Regulators have expressed concern that brokerages are gaming stock trading in a way that entices people to put more money at risk. Robinhood's marketing tactics — such as giving away free stock for friend referrals — attracted an army of first-time investors during the pandemic when Americans were stuck at home and given stimulus checks.
Those clients have since matured as Robinhood launched retirement accounts and yield products as part of a move to guide them to the next stage of their investment journey, according to Steve Quirk, the firm's chief brokerage . Right now, meme stock trading on its platform is only “a fraction” of what was seen in 2021, he said, and investors are broadly seeking diversification through index-tracking funds.
“We're getting them on a good path,” Quirk said.
For decades, interaction between gambling and stocks market participation has been intense interest on Wall Street and research academia alike. To explore the impact of online sports betting on household finances, Kotter and his colleagues used data from an analytics firm that aggregates consumer transactions across major banks, credit card firms and brokerages.
Armed with information on US users and transactions spanning from 2010 to September 2023, researchers from Northwestern University, the University of Kansas and BYU built a model to determine, among other things, whether access to legalized sports betting affects the trend of the population to take other forms. of financial risk.
To control for the effect of macroeconomic forces such as interest rates and inflation, the study compared consumer behavior patterns in states where gambling was legalized with those where it is still prohibited. While the data didn't cover things like retirement accounts, their findings were backed up against state-level tax filings for the broader population.
Net investments in equity brokerages (top chart) and deposits in sports betting apps (bottom chart) since sports betting was legalized. Source: “Gambling Away Stability: The Impact of Sports Betting on Vulnerable Families” by Scott Baker, Justin Balthrop, Mark Johnson, Jason Kotter and Kevin Pisciotta
Notably, the researchers found that as sports betting increased, spending on lotteries and other online gambling activities such as poker also increased. So did things they characterized as gambling-related—things like cable TV and dining out.
However, the fun came partly at the expense of stock ownership, at least when measured by after-tax investments.
Effectively, funds that would be reasonable if risky bets like stocks are now being poured en masse into longer bets where the odds of winning are lower, the researchers claim. Along the way, those who plunged into sports gambling despite strained finances are suffering, with credit card debt mounting and overdraft frequency on the rise.
As betting firms move to woo and secure the loyalty of sports fans, the researchers suggest their findings should serve as a warning to regulators to take a tougher stance on the industry. Coincidentally or not, it also comes at a time when there are standard meme-stock campaigns LOST some of the hits she had in 2021.
“The idea that betting is replacing stock market investing and the growth of betting — those two facts combine to tell a story that's consistent with meme stocks being a little less of a topic right now,” Kotter said. “I don't think it's the main cause of the change, but it's certainly in the background.”